A Review of Canada Post’s Five Point Plan

Canada Post’s Five Point Action Plan is the second iteration of the modern post business plan. The first version, which started in 2008, was unsuccessful and this new one adds the elimination of door-to-door delivery to bring it back to profitability.

This is not the typical business blueprint for future growth. It is a survival plan.

The Five Point Action Plan available at Canada Post’s website has no author, nor any endorsements by any leading corporate or government figures. Nobody, including the president of Canada Post, wants to take direct ownership for this document.

Declining volumes are partially to blame for the present predicament but there is an important variable completely left out — the Canada Post Transformation program is a financial disaster, or at minimum a boondoggle. The Government, employees, or the public have to pay for this poor business strategy.

It won’t be the Government who will pay for this. Lisa Raitt, the Minister Responsible for Canada Post, has made it clear in a September 2013 CBC interview that the Canadian Government has no intention of offering direct financial assistance. She believes that the company must be self-sustaining at almost any cost. She has not publicly recognized any responsibility, whether directly or indirectly, of Government involvement in the transformation program that has led up to the debt crisis. She cited the Conference Board of Canada’s Report, The Future of Postal Service in Canada, as justification for any future changes to Canada Post.

This same report is highlighted in the Five Point Action Plan; the Future of Postal Service in Canada urges a fundamental change in Canada Post business model. This was reviewed previously by Canada’s Modern Post, and was found to be very limited in its scope. It was recently revealed by the National Post that Deepak Chopra, President of Canada Post, is a board member of the Conference Board of Canada — a potential conflict of interest. It appears this was the beginning framework for a spin campaign to justify the new business plan.

In 2007 Canada Post was uniquely positioned for the future — an aging workforce that could be reduced through attrition, little to no debt, a pension plan that was in good shape, and an infrastructure in need of updates. It was ripe for change with minimal negative effect. They could have easily reduced the workforce by 12% under the old system, restructured routes and transportation systems, and would have been able to save roughly $500 million a year through this without any major revamping. It likely could even be more if sound business practices were introduced throughout the network.

Canada Post knew volumes were declining when they chose to start the $2+ billion in upgrades — with money that they envisioned through future profits. However they had absolutely no cash reserves in case something went wrong and it did go wrong. The markets crashed in 2008. They had no profits and no money. Government intervention through loans and an issuing of bonds helped ease the crisis but this left the corporation straddled with serious debt.

See A Brief History of Canada’s Postal Transformation for more information.

Why they put so much money into revitalizing infrastructure for a product that was known to be declining is a mystery. Canada Post could have simply started the slow process of winding down its mail processing system to a much smaller footprint to reflect decreasing demand.

Why couldn’t Canada Post have just sharpened the saw under the old system, built up their cash reserves so that if a rainy day came, or wanted to upgrade, pay for it in cash?

If they had the cash, they could have tested the modern post initiative in a single city or region to test its viability first before a national roll-out. This was never done.

In the last year, Canada Post was looking at alternate day delivery as a cost saving solution. Many Canadians seemed open to this idea. There were some problems with this scenario. The cost of expanding warehouse space to hold alternate day mail would be expensive. The high volumes of mail that occur during Christmas could also not be sustained in an alternate day model. It would have to revert to once a day to keep up during this period. The corporation would also not be able to guarantee businesses that their goods would reach their customers at a committed time, which would mean businesses would look for alternative carriers. It would also require a change to the Canadian Postal Service Charter.

The phasing out of door-to-door delivery and the use of CMBs is more cost-effective and fits within the Canadian Postal Service Charter. This was the reason why CMBs were chosen.

The installation of CMBs combined with the stiff hike in the cost of postage is a serious threat to Canada Post’s future. It may accelerate the shift to electronic communications. The negative publicity may urge the public to use alternate delivery forms for parcel delivery too. There may be a sudden 30 percent drop or more in volumes and in related revenue because of this change. Does the corporation have a strategy if this happens?

There is a serious logistical problem of where these CMBs will be located. Most public sidewalks in residential areas do not have room to safely accommodate such a large piece of equipment. Many homeowners will oppose the stationing of this object in front of their property. Canada Post will have to work with communities and local governments for setting up these boxes on urban streets. It will be time consuming and generate negative publicity. It may take more than five years for some neighbourhoods along with numerous consultations to allow for this installation. Some neighbourhoods may choose to permanently refuse or not cooperate at all. This is going to be a logistical nightmare.

By switching to CMBs, this will significantly reduce the letter carrier workforce. This will mean that there will be excess inventory of new vehicles and buildings recently leased by Canada Post. There will be an oversupply problem. Modern Post Version 1 will become a partial write-off.

Labour attrition was one of the key elements of the first version, but the profits were not realized from it. The present second version attempts to revive this same concept.

The loss of 6,000 to 8,000 positions is of great concern. The concentration of losses will be in the letter carrier sector. A smaller percentage will be supervisors, clerks, middle managers and streamlining in the plant operations. There were approximately 15,000 full time and 1,000 part time letter carrier routes at Canada Post in 2011 — though there has been some reductions in the count since then. It is uncertain how many positions the plan will eliminate since delivery to homes represent only 33 percent of the total points of call according to the Five Point Action Plan document (Pg. 5), or corrected to 71 percent by Jay Bryan of the Montreal Gazette in his article Canada Post Plan is a Disaster — regardless of what percentage door-to-door requires more labour than the other methods. The elimination of this method may reduce the letter carrier workforce anywhere between 40 and 50 percent.

The Five Point Plan outlines that 15,000 employees will be retiring in the next five years, but it fails to point out that this is company wide, not just letter carriers. It may require anywhere from 5,000 to 7,000 letter carriers to retire in order for this attrition to work. If there are not enough letter carriers retiring during this period, it is unknown how this will work out.

The reduction of 6,000 to 8,000 positions also has a negative effect on the pension and will cost the corporation more money. With less contributors subsidizing the plan, Canada Post as a corporation is forced to pay more into it. It is not known how much this will cost Canada Post.

The Five Point Action Plan reveals upcoming changes to the pension plan itself. In a December 13th letter sent to the Hon. Jim Flaherty, Minister of Finance, Denis Lemelin, President of CUPW, outlined that the pension is part of the negotiated collective agreement and no unilateral changes can be made by any party. He questions if the reprieve is contingent on changes to the pension plan and if these changes are going to be imposed by the Government rather than through the collective agreement process.

It is the employees and the public that will have to pay for version 1 of the modern post and its current successor. Employees have to suffer job losses and a decline in benefits. The public loses its home delivery, faces increased prices, and receives less services.

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Canada Post and the Universal Service Obligation

How much money Canada Post is legislated to lose every year.

Canada Post is obligated under the Canadian Postal Service Charter to a uniform pricing structure for any mail services delivered across Canada.

Anyone will quickly notice that sending parcels and mail to remote places such as Rankin Inlet, Nunavut, or Hopedale, Labrador is going to cost more than any profit that could be generated out of these communities. And there are some rural and urban routes too, especially those that have a large transient population and low levels of income generation, that Canada Post would lose money on. However, legislation requires Canada Post to absorb these losses.

Most businesses would not survive with legislation requiring them to lose money, but Canada Post has been able to succeed by profiting in other parts of their delivery network. They also gave back money to the Government as a shareholder dividend for many years until 2008.

With such an odd arrangement Canada Post should be demonstrating in their annual financial statements their losses due to Government regulation. This figure is completely hidden and cannot be factually arrived at without Canada Post opening its books to closer scrutiny. This has yet to happen.

A preliminary estimate still can be made.

The United States Postal Service may provide the answer. They too are restricted under similar uniform delivery standards. It has released some numbers with one report specifically identifying that legislation forces 4.2% of their delivery routes to lose money.(1) Canada Post has many more remote areas to service than USPS and it would likely move the percentage higher, likely to 5% of delivery routes. If this is the case, Canada Post may have been required to lose approximately $375 million dollars this last year(2) which was to be offset by profits in other routes. If one examines this over a ten year period, and makes a slight adjustment for less revenue in the earlier years, Canada Post may have been forced to lose over $3 billion dollars over this period. This has been historically covered by profits in other areas by Canada Post, but now it can no longer be sustained.

This is all hypothetical. 5% of routes losing money may not be 5% of the total revenue. It could be lower or higher based on a calculation of the type of services, volumes, labour, transportation and infrastructure costs in relation to specific routes. These figures are not available. This calculation is based on the few numbers found so far.

One must keep in mind that the Postal Rate Commission which is sponsored by the U.S. Postal Regulatory Commission does not find rural routes less profitable. There is an equal mixture of losses in both the urban and rural routes.(3)

They recognize serious losses in their air parcel program to Alaska, which would correlate with Canada Post’s parcel shipments to northern and isolated Canadian communities. The Postal Rate Commission recommends that regular parcel rates be dropped and more expensive alternatives be given in order to make these routes cost-effective.(4)

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(1)The Cost of Universal Service in the U.S. and its Impact on Competition
(2) http://www.canadapost.ca/cpo/mc/assets/pdf/aboutus/annualreport/2012_AR_financial_en.pdf Pg. 31. Based on Canada Post’s segment annual revenue of $7.5 billion dollars.
(3)IBID The Cost of Universal Service in the U.S. and its Impact on Competition
(4)IBID The Cost of Universal Service in the U.S. and its Impact on Competition

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A Look into the Canada Post Corporation Act

The Canada Post Operation Act and how it relates to the contemporary affairs of the Canadian Post Office.

It is puzzling that the Universal Service Obligation is omitted in the Act but clearly defined in the Canadian Postal Service Charter. The Charter states that delivery cost is to be uniform across Canada and is to be five days a week — though Lisa Raitt, the Minister of Transport, has suggested that delivery days is under review and may be reduced.(1)

It is surprising that although Canada Post is to be arms-length from the Government, the Act points to a strong amount of Federal control. It states that the Corporation shall comply with such directives as the Minister may give to it. These directives do not need to publicly stated and in reality is considered confidential between both parties. The Postal Transformation Project highlights this ambiguity. It is not clear whether Canada Post acted under its own business plan, or was rushed to enact one that was directed by the Minister responsible for Canada Post.

The Act gives the Minister power to appoint the board of directors. If the Minister so wishes, the board of directors can be occupied by those who support the ideology of the Minister, people who align with a certain political party, or can be a form of patronage. They may also lack the necessary skills, experience and training for such a large and complex company. Moya Greene, ex-CEO of Canada Post complained that these type of appointments has hindered Canada Post.(2)

It also gives Employees the ability to own shares of the Corporation, but cannot collectively have more than 10% and do not have the right to vote. This part of the Act has never been implemented.

The Act stipulates that the Government has a set borrowing limit of $500 million dollars for Canada Post. Cabinet can override this if there is a need. There is no requirement for this override to be brought before Parliament or discussed publicly for approval. However, additional funds issued by Cabinet must be repaid. If not, the issue has to be brought before Parliament.

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(1)See the CBC article by Alison Crawford: Cash-strapped Canada Post weighs future of mail delivery
(2)Canada Post: A Blue Print For Change Sept. 2. 2008. Pg. 41

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CUPW Concerned About Canada Post’s Financial Health

The Canadian Union of Postal Workers (CUPW), the largest union representing workers at Canada Post, has serious concerns about Canada Post being able to sustain its daily operational expenses and pension obligations.

Denis Lemelin, National President of CUPW, outlined his concern in a September 2013 letter sent to Lisa Raitt, Minister of Transport:

“As you know, the debate on the future of the postal service, which we believe must be public, is of the utmost concern to us. That is why I am writing to you today about an issue that comes up in all of the Corporation’s interactions with the media: the pension plan. Canada Post states that its line of credit will be terminated in April 2014 and that it will have to resume special pension fund payments, which means it will no longer have enough money to operate.”(1)

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1. CUPW Asks Minister Raitt to Organize a Meeting to Discuss Pension Plan
2. See also the National Post article: Canada Post Poised to Lay an Egg Next Easter
3. There are dissenters within CUPW over this letter. See Pension Plan Discussions September 22, 2013

Posted in Financial

Canada Post in a Financial Crisis: Who is to Blame?

The sudden financial meltdown at Canada Post; who caused it is a secret, but there are some clues.

Many postal employees would argue that Moya Greene, the president and chief architect of the transformation in 2008 is responsible for the present financial problems. However, no one, whether in Government, any board member of Canada Post, or any major newspaper reporter has ever made such a public accusation. It may be unfair to make such a portrait with so little substantive information.

Perhaps the problem was higher up in the Canadian Government. Rob Merrifield was the Minister of Transport at the time the postal transformation project was rolled out in 2008. He has credited himself as part of the nucleus of the change.(1) The postal transformation was at the beginning of the Conservative government’s Economic Action Plan, where money was issued for various work projects to stimulate the economy. Canada Post’s upgrades in infrastructure would have been a significant contributor to construction, manufacturing of equipment, and vehicle purchases without the Government having to directly infuse cash or resources. However, interference by the Federal Government into the affairs of Canada Post is far from being proven. Did they push Moya Greene into a quick transformation program without proper planning? Did Ms. Greene leave when she realized she was about to be scape-goated about a Federal Government enforced plan that was not in the best interest of Canada Post’s long-term health? It is not known.

Another problem in finding culpability is lack of information. The current president is far quieter than Moya Greene; she spoke often at business luncheons, employee meetings, and in parliament. She also allowed other leaders of the corporation to make speeches as well. However today, under the presidency of Deepack Chopra, there are hardly any documented speeches, nor do any other leadership figures in Canada Post speak candidly, and the 2013 parliamentary records contain few substantial references to Canada Post. No reigning members of Parliament have freely spoken in detail on Canada Post’s affairs throughout the last year. Added to this is Canada Post’s reputation for being the most difficult institution in granting information under the Access to Information act(2), it appears that Canada Post is in an enforced political silence.

Right now, nobody can be blamed. There just isn’t enough information on who were the key decision makers.
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1. This relationship is found at Wikipedia and at one time was found at his own Rob Merrifield website.
2. Canada Post still failing, CBC improving on access to information, says watchdog

Posted in Financial

The Conference Board of Canada’s Review of Canada Post

CBOC_3An analysis of The Future of Postal Service in Canada, published by the Conference Board of Canada, April 2013, authored by Vijay Gill, Crystal Hoganson, and David Stewart-Patterson.

It is a concept that is a good start, but is too limited in scope.

The identification of the problems and solutions outlined by this report are not surprising at all, as these have been known and discussed for well over a decade. The Conference Board is simply reiterating Canada Post’s present mantras and does not look outside the corporation’s present mindset for identifying the challenges or possible solutions.

The key problem to this report is the lack of of coverage on the postal transformation project and its associated high risk financial gamble. It was initially proposed in 2008 to be self funding project based on annual forecasted positive growth. Canada Post had absolutely no debt at that time. However, there were no cash reserves in case the plan failed. The market crash of 2008, negative growth, a pension shortfall and a financial commitment to the postal transformation spiraled Canada Post into an economic crisis that has led into a negative equity position and straddled them into billions of dollars of debt.

See the article, A Brief History of Canada’s Postal Transformation for more information on this.

The Conference board failed to make any sincere look at Canada Post’s business plan, which is severely wanting. Neither has the business plan been critically reviewed by any significant public or private entities. Canada’s Modern Post published an article called Questions in early 2011 which asked the single most important question about Canada Post’s economic blueprint that still remains unanswered:

“Why is Canada Post spending so much money on new buildings and infrastructure when mail volumes are declining 1% per year? If Canada Post was publicly traded, would investors infuse two billion dollars for a sales base forecasted on declining volumes or would they just want management to “sharpen the saw” with the least capital possible in the existing infrastructure?”

It is not surprising that Canada Post would lose significant money by investing heavily in new equipment and infrastructure for a product that was known for well over a decade to be declining in sales.

Canada Post nor the Federal Government has yet to definitively answer this key question. This significant omission by the Conference Board severely impairs their independence of thought on the subject and therefore the report does not pass critical judgement.

It is hopefully the start of a difficult discussion and will encourage more comprehensive reports in the future.

The major points forwarded by the Conference Board of Canada are reiterated at Canada Post’s website.

The Conference Board of Canada is a private not-for-profit applied research organization. It is a branch of the Conference Board, Inc. New York. Canada Post had engaged the Canadian branch to undertake this study. The financial terms between Canada Post and the CBOC are unknown.

The president of Canada Post Corporation, Deepak Chopra, has been revealed by the National Post as a board member of the Conference Board of Canada.

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Michael Warren’s Continued Call on Canada Post’s privatization

Michael Warren, a former CEO for Canada Post from 1981 to 1985 once again says yes, but with a twist.

His position was outlined in the CBC Radio program, The 180, on June 9th, 2013. The complete radio broadcast can be found at CBC’s website

The discussion goes beyond privatization and covers the present and future health of Canada Post. He provided a wealth of information.

He believes Canada Post cannot be sold because it is in a negative balance position.

“… Canada Post may be beyond privatization in the sense that its net worth is under water… its… I think would be very difficult to privatize right now.”

He also added a very important business insight at the end of the conversation:

“Once you get into a downward spiral, which I think Canada Post has been in and not seen to be in by man Canadians, cutting service, I know from experience in [jer..] business and some other fields, you gotta be careful when you cut service because you can put your business into a death spiral that you never recover from, particularly if you are not offering a leading edge service or product.”

Posted in Uncategorized